Make Makes Economies Strong?

Over the last year a number of you have pointed out the odd typo or two in my Sunday note. For example, one eagle eyed reader in Brazil registered that I had written ‘South China Sean’ rather than ‘South China Sea’, which is a Freudian slip of sorts.

The real reason the quality of the note may have slipped is that this time last year my ‘editor’ Nicholas Benachi, passed away. In addition to being a good friend, he made sure that the logic and quality of the note were up to scratch. One of his favourite greetings and ‘sign-offs’ was ‘Strength and Honour’, which may have been inspired by his love of bushido and his family’s ties to Greece, not to mention a sweeping appreciation of history.

It is a phrase that comes to mind more and more often in a world where the moral pendulum is swinging wildly, and I often find myself using it as a maxim to scrutinise people, places and projects. Here are a few examples.

Strength and Honour

With respect to people, especially public figures, ‘strength and honour’ can mean that they are trusted and admired by peers, as opposed to feared or derided. The war in Ukraine has, as wars do, exposed a gulf between those who might fall into the ‘strength and honour’ bracket (prime ministers of Estonia, Finland, president of Ukraine) and those who manifestly don’t (Presidents of Russia and Hungary for instance). What is less satisfying is that in many countries being trusted and admired is not sufficient to get and hold power.

Nation states are easier to gauge in terms of their ‘strength’. In the past I have developed a country strength indicator (David Skilling has developed a similar approach to ‘economic strength’). The idea is to identify the factors a country should focus on in order for it to be strong in the sense of not habitually falling victim to the ebb and flow of the world economy and the pressures of socioeconomic imbalances. Strength in this regard is not necessarily made up of military might or large GDP but rather the capacity to stimulate human development, to withstand economic shocks, and to have a stable society, among other values.

The idea of country strength is also more than a set of policies; rather, it is a mentality or policy culture that is evident in countries like Singapore and Switzerland that are acutely aware of the potential impact that outside forces (i.e., immigration, currency fluctuations, and world trade) can have on their societies.

Small advanced states

One finding that shines through in some of the research projects I have been involved in is that the countries that score well on country strength are also the most globalized. Interestingly, they also score well on many other criteria such as “most innovative nation” or most “prosperous nation.” Most of the countries topping these rankings are small dynamic economies (Singapore, New Zealand, Sweden, Switzerland, Finland, and Norway, to name a few), plus larger developed ones such as the Netherlands, and sometimes the United States.

What they have in common are drivers like education, the rule of law, and the deployment of education—their intangible infrastructure. In many respects intangible infrastructure is more important for a country’s future than its physical counterpart. These factors can be political, legal, or socioeconomic. Political factors include the degree of political stability or the strength of the institutional framework. Legal factors include the rule of law, tax policies, and intellectual and physical property rights protection. Examples of socioeconomic factors include research-and-development capabilities, business processes, or employee training and education. There are arguably five specific pillars of intangible infrastructure: education, health care, finance, business services, and technology.

In my view, this framework is the key to surviving a turbulent world, where productivity and social stability will be the two most important policy goals. The tantalising aspect for politicians is that building intangible infrastructure takes a long time (they cannot reap short-term gains), and this places a premium on having high calibre institutions and civil service that can prolong the implementation of national development plans. For this reason, some non or partial democracies are good at developing ‘country strength’ (South Korea in the 1980’s and 1990’s).

There is also a good long-term relationship between growth and the quality of a country’s intangible infrastructure, and sharp changes in ‘country strength’ provoke changes in economic performance – Turkey is the obvious example of a country where structural improvements in institutions have been squandered as deep corruption has taken hold and many of the people who had populated its institutions (professors, teachers, judges, army officers) cleared out of its system.

Another country to watch is the UK, which is becoming a serial institutional and economic underperformer on many fronts. The latest data point to note is Transparency International’s Corruption Perceptions Index released last week, where the UK’s rating has dropped sharply, to its lowest level since 2012 (when the study commenced). The denuding of institutions, undermining of civil servants (the inquiry into bullying by Dominic Raab is an example) and a sizeable drop in spending on social infrastructure are part of a worrying trend.

Other countries to watch here are Israel where the country’s legal infrastructure and political system are being undermined by its new government, and then from a more positive point of view – Ukraine’s attempt’s to curb corruption (the debilitating effect that this has had on the Russian army should be a cautionary lesson), and the opportunity that the geopolitical situation the war has created for Poland to reverse the damage done to its institutional infrastructure (notably legal and human rights).

Strength and Honour!

Mike